Neither side would disagree with the proposition that, to the extent that undetected quality changes are more often improvements than deterioration, direct “comparable replacement” will bias the CPI upward. However, for the bias to be large, undetected quality change would have to be distributed such that, within the sample, missed quality improvements were either much more pervasive or of much greater magnitude than incidents of missed quality deterioration. This has never been shown empirically, possible because judgments by commodity analysts about comparability are not random. A new model (of, say, a microwave oven) with major changes in characteristics is more likely to be judged noncomparable than is a new shirt that displays only minor changes, such as in styling or color, over its predecessor.
For cases deemed by a BLS commodity analyst to require noncomparable substitution—that is, when there is a perceived quality change—BLS uses one of four options (other than hedonics, discussed separately below):
explicit cost-based price adjustment,
a deletion link, or
a class-mean link.
The overlap pricing option can be used when both old and new models are available in at least one period. If the new version is introduced in period t and the old version is also available in that period, the price change recorded for the period t and period t + 1 indexes is determined, respectively, by the price relative of the old item for periods t and t - 1 and the price relative of the new item for periods t + 1 and t. The method does not require direct price or attribute comparison of the old and the new products. Any difference in price in period t is attributed to item quality differences (Kokoski,1993:35). Because the overlap method is employed infrequently, its use (for within-outlet replacement item pricing) is unlikely to be a major source of quality bias in the CPI.10
The second option, explicit cost-based adjustment, is regularly used. Cost-based methods were applied to 11 percent of item replacements in 1995; they can be used when information about production cost differences between the replaced and the new items is available. Under the explicit cost-based method, the per-unit change in production cost, as reported by manufacturers, is subtracted from the
It is fairly clear why the overlap method is used infrequently, given CPI price collection methods. If the regularly priced item is available at time t and it is not known that it will be off the shelf in t + 1, there is no reason the commodity analyst would price a potential replacement at that time. Even assuming the eventual replacement was available in time t, without prior knowledge the method would require going back, at t + 1, to figure out the shelf price of a replacement at the time of the previous trip to the outlet.